Puma Q3 Down, 2010 Looking Up?

PARIS — Puma AG saw ongoing weakness in the latest quarter, but like many footwear firms, its future prospects are brightening.

While acknowledging the firm’s weaker-than-expected third quarter, when earnings fell 24 percent, analyst Christopher Svezia of Susquehanna Financial Group wrote in a report last week that “the company is managing the business well despite difficult macro conditions. We look for clean inventories, decreasing input costs (offset somewhat by unfavorable foreign exchange hedges) and restructuring benefits to help offset a difficult top line over the next several quarters.”

He added, “A stable margin structure, a strong balance sheet and a focus on cost controls should provide … support from significant declines in the near term.”

Puma forecast last week a low- to mid-single-digit percentage drop in full-year sales. The German firm said it expects trading conditions to remain tough until the build up to next year’s FIFA World Cup, in June and July.

“The business environment has continued to be as challenging as we had expected, which resulted in a decrease in [third-quarter] sales and profits,” Puma CEO Jochen Zeitz said in a company statement. “Despite this … we generated a profit in all three quarters so far and we expect to be profitable in the fourth quarter again. We hope to see the first signs of an improving business environment in the run-up to the World Cup in South Africa.”

For the three months ended Sept. 30, net profits at the world’s third-largest sporting goods company, which is controlled by French luxury-to-retail group PPR SA, fell to 67.9 million euros, or $97 million. Consolidated sales for the period decreased 6 percent on a euro basis to 673.4 million euros, or $962.4 million, hurt by declining demand for footwear in the U.S. and Europe. Dollar figures were converted at average exchange rates for the periods to which they refer.

“The consumer is more value driven,” Zeitz said in a conference call, adding that Puma remained committed to improving its working capital management and cash-generating activities.

By region, sales in the third quarter fell 10 percent in the Americas and 6 percent in Europe, the Middle East and Africa. They inched up 1 percent in the Asia-Pacific region.

Regarding Puma’s domestic business, Svezia said, “Revenues in the U.S. were negatively affected by tougher comparisons in the family footwear channel in the third quarter, although we expect trends to improve with market conditions as the brand remains appropriately inventoried at retail and continues to be relevant to the consumer.”

By category, footwear was hardest hit, with sales falling 13 percent in the quarter, while apparel slipped 3 percent. Sales of accessories climbed 40 percent. Looking ahead, Zeitz said it was impossible to give clear projections in such a difficult and volatile market, but he anticipated that Puma’s reengineering and restructuring program, which should be finalized by year-end, would generate improvements in efficiency and cost savings in the future.

“Puma’s brand strength remains strong globally, and we expect trends to improve with market conditions. In the near-term, management has shown a willingness to cut costs and focus on inventory management and free cash flow generation, which should provide downside support to the shares,” Svezia said. “Given tight inventory levels, we do not expect upside to our top-line estimates unless a meaningful sales bump from the World Cup materializes, particularly in the first half of 2010.”

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